The owners of a partnership have the ability to pay themselves two different ways. Partners pay themselves through guaranteed payments or an owner’s draw. While these sound similar, each has a different tax impact. Also, running a traditional payroll for the owners isn’t allowed since their income must be subject to self-employment tax. This information will help you determine which method is right for your business.
Guaranteed Payments
- These payments are a substitute for a partner’s salary by compensating them for their time.
- The timing and amounts must be outlined in the partnership’s operating agreement.
- Payments are made whether or not the business is profitable.
Owner's Draws
- Draws from the business are considered to be an advance of expected profit.
- Payments are made out of a partner’s equity account.
- There is no strict timing or balance requirement.
How to Make Payment
- For either type of payment, transfer money (via check, ACH, or online transfer) from the business to the individual partner’s bank account.
Tax Impact - Business
- Guaranteed Payments – These are a tax deductible expense for the business.
- Owner’s Draw – Payments are non-deductible.
Tax Impact - Individual Partners
- Guaranteed Payments – This is taxable to the partner and subject to self-employment tax.
- Owner’s Draw – Assuming the partner has basis in their capital account, owner’s draws are non-taxable to the individual.
Other Considerations
- Health Insurance – The company has the ability to pay for a partner’s health insurance through guaranteed payments.
- Partners can receive different guaranteed payment amounts based on roles and responsibilities.
